How are gains or losses recognized in a nonmonetary exchange with commercial substance under U.S. GAAP?

In a nonmonetary exchange that possesses commercial substance under U.S. GAAP, both gains and losses are recognized. A transaction is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The recognition of both gains and losses is consistent with the underlying principle that financial statements should reflect the economic reality of transactions, providing users with accurate information about the company's financial position and performance.

When a nonmonetary exchange with commercial substance occurs, the fair value of the assets exchanged is used to determine any gains or losses. Therefore, if the fair value of the asset given up differs from its carrying amount, the difference is recognized as a gain or a loss in the financial statements. This treatment ensures that all changes in economic value due to the transaction are transparently reported.

The rationale for recognizing both gains and losses is to ensure that the financial reporting reflects the actual economic outcome of the exchange, accommodating the principle of full disclosure and the portrayal of the economic impact on the company's operations.